a second fax machine from which to send and receive documents. Positive network effects are almost always a defining attribute of disruptive businesses in the second digital era because they are a defining attribute of digital networks. Today, platforms like Instagram, Pinterest and Snapchat all benefit from positive network effects.
Compressing Diffusion Cycles: One of the properties of the second digital era is the ability to quickly evaluate the potential of a market. Historically, companies could innovate slowly around core businesses to create and capture value, but that is no longer the case. Upstarts are creating value around existing business from all sides. Digital compresses diffusion cycles, and that, in turn, compresses adoption cycles – meaning startups are able to create entire businesses and industries nearly instantaneously. In the second digital era, we are moving from a world of incremental innovation to one wherein value is created and organized quickly.
A Shift to Services: Over the last 50 years, we’ve been spending more on services rather than goods. In the 1960s, about 45 percent of total spending was on services. Today, that figure has increased to 66 percent, and the actual figure is likely higher when you add in devices that rely on accompanying services to demonstrate their value to end users. The products and devices launched in today’s digital environment increasingly look more like services. For instance, one buys a smartphone (hardware), which is able to accomplish certain functions. But the value of the hardware is really delivered through the services (apps), which are regularly updated.
Multi-Sided Platforms: Uber, Square, Craigslist, and even services like Tinder or WeChat are all examples of successful multi-sided platforms – marketplaces that allow participants to have direct interaction with each other. The scaling and network effects of digital environments create an atmosphere well suited for multi-sided platforms, or what economists call two-sided marketplaces. These marketplaces have two distinct groups, each of which benefits from interaction with the other side. Examples include temporary staffing agencies (workers and employers), search engines (advertisers and users), credit card networks (merchants and cardholders) and even shopping malls (shoppers and merchants).
Legacy businesses and industries are fortunate that we can identify what success looks like in the new digital era. But that doesn’t mean it’s any easier for these entrenched enterprises to restructure themselves to fit the new business models. Even the largest, most successful enterprises must continue to innovate in a digital economy. If not, they’ll join the ranks of Blockbusters, Borders and, perhaps, taxi companies.
